A blog for Small Business Consultants and the vendors who serve them. It contains Opinions on business success, News in the SMB consulting space, and Information on what I'm up to.All material Copyright (c) 2006-2020 by Karl W. Palachuk unless otherwise noted.

Friday, September 23, 2011

SOP Friday: Cash Flow: Dealing with Late Payments

I addressed Getting Paid In Advance a few SOP Fridays ago. In that process, I spelled out some proposed policies for getting your money up front. Remember, it is better to have someone else's money in your bank than to have your money in someone else's bank!

But along with policies about how money should be collected, you need some procedures about how you'll actually collect it. This week's installment is an intro to money collection policies.

- Overview -

Again, many people start their small businesses with no real policies about money. We assume that everyone's honest, everyone is willing to pay for what they get, and everyone understands that we're just a small company trying to get by. And, 99% of the time, that's true. But that 1% can be a huge pain the butt!

Setting Terms

To begin with, you need to establish the terms you will offer clients. Terms and payment policies are directly related, but are not the same thing. You might have terms of "Net 30" from Ingram or Synnex. That means that the total payment is due within 30 days of when you placed the order.

You can have different terms for managed services, hourly labor, and hardware/software/materials. For us, anything we resell (hardware/software/materials) is "Due Upon Receipt" and we have to receive the money before we order the product. In this way, we're 100% sure that we will never owe money to a supplier for a product and then have to wait to get paid.

We require that managed services be paid on the first day of the month and is considered late on the 5th . . . just like the rent. As I've mentioned before, our actual policy is that managed services are prepaid monthly by credit card or three months in advance if the client pays by check.

[Side note on credit cards: This is the 21st Century. You just have to take credit cards. They allow you to get paid in advance . . . just as you pay in advance for many of your own bills. Yes you have to pay some small percentage every month. Just do it. If you need to lower your rate, contact My Man Richard to get set up with a lower rate. But even if you pay 3%, it's always better to have the money guaranteed on the first day of the month than to have to deal with collections.]

As for hourly labor, we have terms of "Net 20 Days." That's pretty generous (in my opinion), but still puts each payment after the next payroll cycle since we pay twice a month. Keep these connected in your mind: Clients are paying you for labor that was delivered on Day 0. You paid your employees for that on Day 15. The client can pay you as late as Day 20.

You need a little cash on hand to make this "float" happen. That's reasonable. But having the client ignore you and not pay for 30, 60, or 90 days is not reasonable. Keep that in mind.

We also charge Late Fees and Interest. You will charge late fees for any payments received after the 5th of the month, or for whatever the term is on other invoices. We recommend a simple $25 fee. Not too big. Just enough to get their attention.

As for interest charges, we charge 18% per anum or 1.5% per month. Quickbooks is real good at calculating this. We apply interest charges every Monday right before we do billing for the previous week. Note: Your state may limit the interest you can charge without a service agreement in place.

Some people just refuse to pay late fees and interest charges. For some reason, they think the I.T. company is different from the bank, the landlord, the copy repairman, the heating and AC company, the janitor, the carpet cleaners, and everyone else they deal with. If you're different on this front, it's because you've allowed yourself to be.

We eventually collect these fees from everyone. One day they'll overpay, or have a refund coming for some reason. Simply apply the refund amount to any outstanding late fees and interest changes, and refund the rest.

In very drastic cases, we have cut off clients who owe us more than $500 for more than 30 days. After a couple instances, they learn to pay on time.

- Implementation Notes -

The implementation of these processes is not difficult, and there aren't a bunch of forms. But you do need to take care of three stages of implementation.

First, you need to figure out what you want to do with your terms. Write it down, just like the paragraphs above. Put this in a binder for Operations (as opposed to Technology policies).

Second, you need to write one or more letters to your clients clarifying your policies. You should also review your contracts (everyone needs a signed Service Agreement with each client. Your agreement should state your policies and be flexible enough to allow minor changes with a memo.

Third, you need to implement your policy. Next Monday, review your past due balances. Assign late fees and email out invoices for those. Then assess interest charges. Identify clients who are grossly over due (e.g., $500 for 30 days) and take appropriate action.

Most importantly, stop worrying! You're not going to lose clients simply because you have the same policies in place that THEY have with their clients. These are very normal business terms. So don't freak out about it. Just implement and move on.

Your Comments Welcome.

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About this Series

SOP Friday - or Standard Operating System Friday - is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.

3 comments:

I am very comfortable in my billing practices and I have NEVER had to send a client to collections nor have I ever had to even threaten to. I will admit some of this is luck but a lot of it is that I'm very clear on my terms and I line up exactly with this SOP and I always have. (See my previous comment on my first customer screwing me 15 years ago when I was in the 6th grade)

Having said that, 12 months ago I had a client hid a very rough patch in his business. He had been with me since 2001. We have always had great communication, he has been a great customer, and has NEVER EVER failed to pay. He asked me, basically hat in hand, if he could hold off on paying me for 3 months and catch up. I had to make a business decision here and for me, it was an easy one. I said fine. I let him know he would have to pay for any extra services in that month but his base MSP services would be covered.

Three months later, he paid in full. Three months after that, he was out of business and when he went out he was paid in full.

Last month I got a call from him as he is working for a new company and he brought me in with this new company and they are twice as profitable as his company.

So my point in this whole comment is that yes, have this SOP, have it sent in stone ... but use good business sense when you have to.

All very good information for like-minded and like-sized customers, but these terms are unlikely to work for large enterprise customers and won't work at all for government customers. You either get paid according to their terms or you lose their custom.

I have to admit that, during the recent recession, we've had to work with some clients. You need to do what makes sense as people dealing with people in business.

But the point remains that you need to have some policies in place.

As for larger businesses, they do require a different set of policies. But they are also more likely to sign a contract regarding payment and stick to it. Our experience with very large companies is that they all pay late all the time. The people who make buying decisions are not the same as the people who make payment decisions. But they tend to pay their late fees on time. :-)

We haven't worked with the federal government. We don't work with the State of California because they abuse their state contractors and sometimes pay in "IOUs" (which our bank doesn't cash).

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I make every attempt to honestly state what I believe and enjoy the freedom of posting whatever I feel like on this blog. This is a big complicated world and I have many interconnected personal and professional relationships.

I may in some way receive money or other benefits from any of the products, services, or companies mentioned in this blog as a direct or indirect result of my actions on and off this blog. Any experience mentioned here is just my experience and I have no knowledge about whether it represents a typical experience with any products, services, or companies mentioned.

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